Most observers believed that a crisis-driven boom in Asian bank mergers and acquisitions would start in 1998. They were wrong: in the nine key markets of emerging East Asia—China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand—private-sector bank M&A remained roughly flat in 1998, at around $5.6 billion. That is comparable to the levels of 1996, before the crisis.

Yet the forces driving this merger boom that never came didn’t go away; they intensified. The M&A boom is already starting, and over the next two years it will hit with a vengeance. By the time this wave has passed, a third to a half of Asia’s banks will either acquire other banks or be acquired by them. Every player in the region must consider the strategic implications of the changes that are about to occur. The boldest players will seize this brief window of opportunity to reshape Asia’s banking industry and become the new leaders of what will probably be the world’s fastest-growing financial services market over the next ten years.

Why bank M&A activity is about to surge

Local banks need capital, and they must turn to outside investors to find it. Nonperforming loans...